Business Performance: Over-emphasis on financials?

Where companies focus their attention is an important strategic issue for companies, and one that needs active consideration. Are you in danger of over-emphasising the financials? That is a contentious issue given today’s economic climate; how can we possibly over-emphasise the financials – particularly in the current situation? Companies have a duty to ensure their survival and thus have to take the necessary steps to make their business robust, especially in the climate most organisations operate within. However, if they place insufficient emphasis or ignore the future it will have a substantial impact on their long term development, their long-term survival and their share price. Every chief executive would agree, of course, that the future is important and is high on their strategic agenda, but is this borne out in practice? My experience of working with a number of companies and examining how they operate in practice suggests this future-focus is far from universal.

There are companies big and small that are putting excessive emphasis on their financials, sometimes driven by a senior management bonus structure which can lead to decision of a very short term character. One organisation I know is faced with its divisional managing directors honestly admitting that if they are going to make their bonuses for the coming year they are likely to undermine their business’s competitiveness. This has brought about a sober realisation that the company’s senior managers have been taking such an approach for several years, and as a result they have failed to invest sufficiently in future capabilities and resources that their company needs for long term profitability. For this company and many others, such short-termism has become a pressing issue.

Another company approached me to assist them in working through a review of their strategy against a background that for the last twelve months they have been rebuilding following a substantial reorganisation. Now they have the right structure, they have belatedly realised that their excessively short-term financial focus will not deliver the business benefits that are required. Making their strategy very explicit has helped them to take their heads above the parapet and turned their financial performance round by thinking again about how they place their priorities on their future.

Active consideration of the future is essential, even though managing for today is also critical. Two examples further illustrate this point. Telecoms company BT, a few years ago, was performing exceptionally well, with quarter on quarter profitability looking healthy. Was this reflected in the share price? Perhaps strangely at first sight, the share price kept falling. The reason for this was that, at the time, the market was sceptical that the company had faced up to the technological changes that were becoming apparent, and that one day such changes would substantially affect the business. Hence, profits up, share price down.

A second example concerns retailer Tesco: a few years ago they announced that they expected the growth in the UK grocery market to fall. What happened to Tesco’s share price? It went up following that announcement, because most analysts believed that Tesco understood the UK market and were taking necessary corrective action. It demonstrates that sometimes declaring bad news to analysts will indicate an understanding of long term issues affecting a business and shows you are taking steps to improve the future position.

These observations are based on experience of working with companies, talking to analysts and observing how companies are performing in the round, as opposed to the way they are superficially performing against narrow financial indicators. Buy side analysts are constantly scrutinising company data and looking beyond headlines. If you fail to recognise this context and take action with this in mind, your business may well suffer.

Financial results are the overall outcome of everything the business does, so of course they are the focus of enormous interest. However, over-emphasis on current financial performance will give your company a limited lifespan. To some, such messages will be too readily dismissed- over a period of time today’s numbers may well have started to dominate. Such short-termism could cost you dear.

The message has to be to keep a firm eye on future trends which may impact you and then act on what you see. You are likely to be only too aware that your customers are being courted by your competitors – so make time to review new products and services and all of those things that you can do that will keep customers loyal to you and grow your business. Analysts understand that as much as they want to see good news from the last quarter’s results, what they really want to see is a business with a viable and profitable future. To achieve sustainability, both day-to-day and long-term time frames need to be managed. Looks deceptively obvious doesn’t it? Achieving this balance is the essence of managing business performance successfully.